Part 4
CHAPTER 6
THE SUNFLOWER SEED-COOKING OIL SUPPLY CHAIN
6.1 Background and industry overview
After maize and wheat, sunflower seed is the most important field crop in South Africa.
During the period of regulated marketing the Oilseeds Board controlled most aspects of
the industry. Prices were determined by domestic demand and supply, as well as by
export pool prices derived by the Oilseeds Board. Prices were fixed for a season and
producers were faced with a single-channel marketing scheme (NAMC, 1998). However,
this situation changed with the introduction of the Marketing of Agricultural Products Act
(No 47 of 1996 as amended), which led to the deregulation of the industry and the
abolishment of the Marketing Board. Since deregulation, prices are determined under free
market conditions and formally traded on the Agricultural Markets Division of the South
African Futures Exchange (SAFEX).
Over the past ten years, the area planted under sunflower has fluctuated drastically. An
important relationship exists between the area planted under maize and the area planted
under sunflowers due to the nature of their substitutability. Sunflowers are well adapted
to the South African hot and dry climate and can be produced economically even when
there is not enough moisture to produce most of the other summer crops. Figure 6.1
below, shows the area planted and the production of sunflower seed. In 1999, the highest
level of production ever was reach when 1.1 million tonnes of sunflower seed were
produced. In the past season (2002/03) 736 000 tonnes were produced on a total area
harvested of 634 000 ha.
Production: Seed
Area planted
1400
1200
'000 tons & '000 ha
1000
800
600
400
200
0
1994
1995
1996
1997
1998
1999
Year
Figure 6.1: Area planted and production of sunflower seed
Source: DoA, Crop Estimates Committee, 2003
230
2000
2001
2002
2003
Analysis of selected food value chains
Approximately 95% of all sunflower seed produced in South Africa is destined for the
processing industry for the production of sunflower oil. Sunflower oilcake - also referred
to as meal -, a by-product of the oil extraction process, is sold to feed manufacturers
domestically. It is generally regarded as a low-value product that does not compare well
to soybean oilcake in terms of nutritional value. Therefore, the dilemma of the sunflower
market is that not enough sunflower seed is produced locally for the oil industry, yet once
the seed has been crushed the by-product is regarded as a low-valued product. Over the
past decade, the total demand for sunflower seed, derived from the total demand of
sunflower oil, has increased to over 1 million tonnes, which makes South Africa a net
importer. Important to note is that it is not the seed or the cake that is imported, but the
sunflower crude oil. Table 6.7 (section 6.4) presents the sunflower oil imports over the
past three years.
Table 6.1 shows that the total consumption of sunflower oil in South Africa (including
the exports to SADC countries) is estimated at 451 781 tonnes, of which 321 530 tonnes
were produced locally and 130 251 tonnes were imported. Although no formal data are
available on the consumption of sunflower oil for the period 2001/02, it is estimated that
the total consumption (including exports to neighbouring states) decreased because
imports of sunflower crude oil1 decreased by 97% (Table 6.7) as a result of the drastic
increase in sunflower crude oil prices and the depreciation of the exchange rate.
Table 6.1: Consumption of sunflower oil by segment
Total sunflower oil market volume by segment - 2000
Tons
Retail
83 781
General Trade
53 000
Wholesale
110 000
Industrial
52 000
Bulk
40 000
Exports of refined oil (mainly SADC)
113 000
Total consumption
451 781
Source: Own calculations
It is important to take the usage spread of sunflower oil into consideration. It is
interesting to note that, despite the fact that the Indian population makes up only 2.5% of
the total SA population, its expenditure on sunflower oil is estimated at a massive 33% of
the total SA expenditure on sunflower oil. It is estimated that the white population is
responsible for 25% of all expenditure on sunflower oil.
Table 6.2: Usage spread of South African Population
African
White
Coloured
Indian
Other
% Population % Expenditure
76.79%
14.08%
10.86%
24.88%
8.89%
16.67%
2.47%
33.10%
0.99%
11.27%
Source: Own calculations
1
Note: crude oil is imported and refined oil is exported
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Part 4
It is well known that South Africa is a net importer of oilcake products. Table 6.3 below
shows the availability of the total oilcake in South Africa. Interestingly, the import of
sunflower cake shows a decreasing trend compared to the total available oilcakes,
whereas the usage of soybean cake increased substantially over the same period.
Table 6.3: Oilcake usage by AFMA members, 1 April 1999 to 31 March 2002
OILCAKE (tons) 1999/2000
% Inc
2000/2001
% Inc
Soya
402 190
9.77%
406 677 10.32%
Sunflower
304 970
7.41%
286 078
7.26%
Cottonseed
54 165
1.32%
43 758
1.11%
Groundnuts
5 699
0.14%
3 845
0.10%
Canola
12 420
0.30%
8 683
0.22%
Copra & Palm
TOTAL
779 444 18.94%
749 041 19.01%
Source: AFMA chairman’s report, 2003
2001/2002
% Inc
495 546 12.27%
232 460
5.76%
53 741
1.33%
5 164
0.13%
8 347
0.21%
1 719
0.04%
796 977
19.73
Figure 6.2 illustrates that over the past five years the total production of sunflower cake
has exceeded the total consumption. This has created an increased downward pressure on
the price of sunflower cake. The price of sunflower cake is derived from its relative
nutritional value compared to other oil cakes. The calculation of this derived cake price is
illustrated in section 6.3.
Cake Production
Domestic Cons.of Cake
400
350
300
'000 tons
250
200
150
100
50
0
1999
2000
2001
2002
2003
Year
Figure 6.2: Production and consumption of oilcake (Source: AFMA, 2003)
Estimated figures for 2003
According to members of AFMA, the South African feed industry is capable of utilizing
more than 300 000 tonnes of sunflower seed meal per annum. According to the
members, usage is restricted by the following criteria: (i) the ratio of soy-bean meal to
sunflower seed meal prices, (ii) high transport costs to coastal regions, (iii) inconsistent
quality of sunflower seed meal from crushers (high fibre, low protein) and (iv) the low
232
Analysis of selected food value chains
availability of sunflower seed meal as a result of low oil prices and thus reduced
crushing. Table 6.4 presents the nutrient composition of meals of selected oilseeds.
Table 6.4: Comparative nutrient composition
Item
Nutrient
Crude protein (%)
Crude fibre (%)
Energy (ME/Kcal/kg)
Sunflower
seed meal
with hulls
Sunflower
seed meal
without
hulls
Soybean
meal
with hulls
Soybean
meal
with hulls
Peanut
meal
28.34
23.00
1760
43.00
13.00
2320
44.00
6.00
2320
49.00
3.00
2530
42.00
12.00
2200
Amino acids
Lysine
1.18
1.70 (84)
2.70 (90)
3.07(92)
1.70(83)
Methionine
0.72
1.65 (93)
0.63(91)
0.68(94)
0.50(93)
Cystine
0.55
0.40 (78)
0.70(82)
0.69(92)
0.62(78)
Threonine
1.21
1.70 (85)
1.70(87)
1.94(92)
1.28(85)
Note: Figures in parentheses indicate percentage digestion coefficients of respective amino acids.
Source: Reddy, 2000. (Competition Commission)
6.2 Market Structure
6.2.1
Primary Industry
Information on the number of sunflower seed producers is not available, but industry
sources believe the number of producers is just slightly lower than the number of maize
producers. This is due to the fact that farmers plant both crops simultaneously as part of
their diversification strategy. Table 6.5 shows the regional distribution of sunflower seed
in South Africa in 2001/02 and 2002/03. The regional distribution remained
approximately the same over the two seasons. The Free State is the leading producer with
a share of 49% of the total area planted and 52% of the total production, followed by the
North-West Province with 36% and 35% respectively.
Table 6.5: Regional distribution of area planted and production of sunflower seed
Area
Area
% Share Production Production % Share
planted (ha) planted (ha) (02/03)
(tons)
(tons)
(02/03)
2002/03
2001/02
2002/03
2001/02
Western Cape
500
0.08%
500
0.07%
Northern Cape
300
250
0.05%
720
500
0.10%
Free State
310 000
305 000
49.36%
372 000
443 000
52.63%
Eastern Cape
200
200
0.03%
240
200
0.03%
KwaZulu-Natal
100
60
0.02%
100
90
0.01%
Mpumalanga
40 000
30 000
6.37%
46 000
52 500
6.51%
Limpopo
37 000
40 000
5.89%
22 200
50 000
3.14%
Gauteng
10 000
12 000
1.59%
12 000
18 000
1.70%
North-West
230 000
280 000
36.62%
253 000
364 000
35.80%
Total
628 100
667 510
706 760
928 290
Source: Crop Estimates Committee, 2003
6.2.2
Secondary Industry
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Part 4
The top eight seed-crushing plants yield more than 300,000 tonnes of sunflower meal
annually, with a total crushing capacity of over 1 million tonnes of sunflower seed (Table
6.6). This implies that, given the current total production of sunflower seed of 706,760
tonnes, only 65% of the total local crushing capacity are utilised. This opens a window
for what is in the industry referred to as “toll crushing”. Due to the surplus crushing
capacity, there is an opportunity for any role player in the industry to crush seed, sell the
crude oil at a lower price than the import parity price and still manage to realise some
profit. This phenomenon makes the crushing industry highly competitive since the
utilisation of crushing capacity is readily available to anyone in the business. The fact
that there exists excess capacity in South Africa with respect to the processing of oilseeds
is exerting more and more pressure on the ability of large and small processors’ to reach
and maintain an optimum level of economies of scale.
Table 6.6: Largest crushing plants in South Africa
Location
Crushing
Capacity (tons)
Processor
Boksburg & Randburg
Nola Industries
400 000
Southdale
Epic
200 000
Lichtenburg
Epko
170 000
Isando
Willowton Oil Mills
100 000
Viljoenskroon
Senwesko
100 000
Pietermaritzburg
Capital Oil Mills
50 000
Isithebe
Elangeni Oil & Cake Mills
30 000
Pietermaritzburg
Sealake Industries
25 000
Total
1 075 000
Source: Industry specialists, 2003
The South African Oil Processors Association (SAOPA) represents the oil processing
industry’s interests. Table 6.7 presents a list of oil refineries, which are currently
members of the Association. It is interesting to note that not all crushers have a refining
capacity and not all refiners have crushing capacity. Eight of the thirteen refineries are
relatively close to Durban harbour from where sunflower crude oil is imported.
6.2.3
Other relevant aspects
Oilseed processing is highly capital-intensive, and requires specialised knowledge and
state-of-the-art technology. The fact that large quantities of crude oil are entering South
African harbours for refining makes it very difficult for large and small processors to
survive. Oil mills near the respective harbours have a big advantage in this regard, as
their transport costs are very low (e.g. only from Durban harbour to Pietermaritzburg). In
other words, location of processing facilities and transport cost can be regarded as very
important.
234
Analysis of selected food value chains
Table 6.7: South African Oil Refineries
Location
Refiners
Pietermaritzburg
Capital Oil Mills
Randfontein
Continental Oil Mills
Isithebe
Elangeni Oil & Cake Mills
Southdale
Epic Foods
Lichtenburg
Epko Oil Seed Crushing
Cumberwood
Hentiq 1320
Rivonia
Nedan Oil Mills
Randfontein
Nola Industries
Pietermaritzburg
Sealake Industries
Isipingo Beach
Sun Oil Refineries
Port Shepstone
Sunola Oil Mills
Durban
UBR
Isando
Willowton Oil Mills
Source: The South African Oil Processors Association
Processors, especially large ones, must keep themselves up-to-date with technological
innovations in the oilseed processing industry in order to be compete with large overseas
processors. This, in fact, hampers the ability of the industry to maintain, or reach,
economies of scale. Most of the local crushing plants were established in the mid-eighties
and have not been revamped since. The distance from crushing plant to the market also
influences role players' ability to achieve economies of scale. For example, a number of
small processors have the disadvantage of being far from the market, in contrast to the
larger ones who built their factories closer to the markets of Gauteng and KwaZulu-Natal,
or those that are situated near harbours. The issue here is the relative difference in
transport costs of transporting the primary commodity to the processing plant and
transporting the processed product to the market, which affects, particularly, the smaller
processors.
A concern shared by the entire industry is the utilisation of used oils. Used oils comprise
between 50,000 and 100,000 tonnes annually that are being recycled back into the
economy. Used oils have alarming health risks, a topic that is currently under researched
by Professor Kock at the University of the Free State. Used oils are substantially cheaper
than virgin oils, and they offer unscrupulous operators the opportunity to exploit
consumers (Stromnes, 2001, Competition Commission, 2002).
As with the other agricultural sub-sectors, also the oilseeds industry must adhere to
several regulations pertaining to food safety. These regulations include, amongst others,
the following:
ƒFoodstuffs, Cosmetic and Disinfectants Act of 1972 (Act 54 of 1972)
ƒHealth Act of 1977 (Act 63 of 1977)
ƒFertilisers, Farm Feeds, Agricultural Remedies Act of 1947 (Act 31 of 1947)
ƒAgricultural Products Standards Act of 1990 (Act 119 of 1990)
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Part 4
6.3 Price formation in the sunflower seed market
As with all other field crops, prices of oilseeds vary substantially from one season to the
next. Although sunflower seed is also traded on SAFEX like maize and wheat, the local
price of sunflower seed is not only influenced by the supply and demand factors of
sunflower seed but also by the supply and demand factors of the local and international
sunflower oil market. The international oil prices act as a guideline for domestic seed and
oil prices. In particular, the situation of the Argentinean oil market has a significant
impact on the local market since the Argentinean oil market has the same marketing
period of sunflower seed as SA producers. Hence (see Figure 6.3 below), the sunflower
crude oil price at the Reef is derived from the Argentinean free on board (fob) price for
sunflower crude oil. The crude oil price, as illustrated in the figure below, can be
regarded as an import parity price of crude oil at the Reef (in Rand terms) seen that the
costs of transport, discharge and insurance are taken into account. The calculation of this
import parity price is illustrated in section B1 of Table 6.9.
SUNFLOWER CRUDE OIL PRICE, FACTORY @ REEF
SUNFLOWER OIL RETAIL PRICE
SAFEX Sunflower Seed Price (Nearby contract - 3-month lag)
3500
12000
3000
10000
2500
2000
6000
1500
R/ton Seed
R/ton Oil
8000
4000
1000
2000
500
0
Jan-00
Figure 6.3:
0
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Sunflower oil and seed prices
Source: Reuters, SAFEX & AC Nielsen, 2003
Figure 6.3 shows the relationship between the retail price of sunflower oil, the crude oil
price at the Reef and the sunflower seed price traded on SAFEX. As previously
mentioned, South Africa is a net importer of oil, which implies that the local price is
normally traded close to import parity levels. If a refinery can import crude oil from
Argentina at a lower price than that of the locally produced oil supplied by the crushers,
the refineries will simply decide to import the oil. This is the reason why more than 60%
of all the sunflower oil refineries are close to Durban harbour. South Africa is not a
significant role player when it comes to international oilseed production and trade, and,
therefore, South Africa is regarded as a price taker.
The sharp increase in the price of sunflower crude oil during November and December
2001 not only was caused by the depreciation in the exchange rate, but it also coincided
236
Analysis of selected food value chains
with a drastic increase in the fob price of Argentinean sunflower oil, which resulted in the
opening of a gap between soybean oil and sunflower oil prices (Figure 6.4).
700.00
14.00
600.00
12.00
500.00
10.00
400.00
8.00
300.00
6.00
200.00
4.00
100.00
2.00
0.00
Jan-01
R/US$
US$/ton
Sunflower Crude Oil, Argentina FOB
Soybean Crude Oil, Argentina FOB
Exchange Rate
0.00
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Figure 6.4: World sunflower and soybean crude oil prices and exchange rate
Source: Reuters and SAFEX, 2003
Historically, sunflower oil world prices have traded at an approximate premium of
US$20/ton over the world prices of soybean oil. Hence, the fact that the gap between
sunflower oil and soybean oil was as high as US$222/ton, during the period December
2001 to January 2002, influenced the behaviour of crushers and refineries significantly.
This issue will be further discussed in section 6.4.
When considering the international market, it becomes clear that not sunflower seed is
imported but sunflower crude oil. The price that an oilseed processor is willing to pay for
sunflower seed should therefore be derived from the import parity price of sunflower
crude oil, as well as from the prices of other oils that can serve as substitutes for
sunflower oil, such as soybean oil. Despite the fact that more than 300,000 tonnes of
sunflower cake are produced locally, cake is regarded as a by-product and prices are very
volatile. The local price of cake is influenced by demand and supply factors on the cake
market. Figure 6.5 presents the derived prices in Rand terms for sunflower oil and cake at
the Reef.
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Part 4
Sunflower Crude Oil Price: Derived-Reef
1800
9000
1600
8000
1400
7000
1200
6000
1000
5000
800
4000
600
3000
400
2000
200
1000
0
Jan-00 May-00 Sep-00
R/ton Oil
R/ton Cake
Sunflower Oilcake Price: Derived-Reef
0
Jan-01 May-01 Sep-01
Jan-02 May-02 Sep-02
Jan-03 May-03 Sep-03
Figure 6.5: Derived sunflower oil and cake prices at the Reef
Source: Reuters, AFMA & own calculations, 2003
The sunflower crude oil price in Figure 6.5 is exactly the same price as used in Figure
6.4, that is, the crude sunflower oil price at import parity levels at the Reef. The
sunflower cake price is derived from the soybean cake price after the relative protein
content and the final consumption value of the cake is taken into consideration. The
prices of both oilcakes are calculated at import parity levels and in Rand terms. Firstly,
the soybean cake price has to be adjusted to take into account the different protein
contents of sunflower cake (38% protein) and soybean cake (47% protein). Therefore, the
soybean cake price has to be divided by 0.47 and multiplied by 0.38. The second step is
to multiply this adjusted cake price by 0.65. The reason for this is that industry specialists
regard the final consumption value of sunflower cake to be 65% of the value of soybean
cake. Factors like the high fibre content of sunflower cake reduce the digestibility of the
cake, which reduces the final consumption value of the product. Due to the lack of a
formally traded sunflower cake price, this formula can serve as a guideline in the
determination of a local sunflower cake price. However, the level of cake prices in the
first quarter of 2003 proved that this formula does not always provide an accurate
estimation of what the local price of cake ought to be. For the first three months of 2003
sunflower cake traded at an average price of R800/ton, whereas the formula rather
suggests an average level of R1270/ton. It was purely local demand and supply
conditions of cake that dictated this low price.
South Africa is a net importer of sunflower and soybean oil and, therefore, import tariffs
have a direct effect on the level of local prices. A few years ago, the import tariffs on oils
and cakes were revised and the new tariffs are shown in Table 6.5. Sunflower and
soybean oil are both imported at a fixed import duty of 10% of the free on board price
(fob) of crude oil.
238
Analysis of selected food value chains
Table 6.8: Applied import tariff duties on different oilseeds and oils
Tariff line
Product description
12.0100
Soya beans, whether or not broken
Groundnuts, not roasted or otherwise
12.0210
cooked, in shell
12.0600
Sunflower seeds, whether or not broken
15.0710
Soya oil and its fractions
15.0810
Groundnut oil and its fractions
15.1211
Sunflower seed oil and its fractions
Source: Cargoinfo, 2003
Standard duty
rate (%)
10
EU applied
tariff rate (%)
0
0
0
9.4
10
9.8
10
7.5
0
0
0
6.4 Unpacking the sunflower seed–to-sunflower oil value chain
Similar to the maize-to-maize meal value chain analysis, various assumptions had to be
made to construct the framework for the unpacking of the sunflower seed–to–sunflower
oil supply chain as presented in Table 6.9. The basic assumptions used in the calculation
of this value chain are based on the same principles as the assumptions used in the
calculation of the maize-to-maize meal value chain (Chapter 2). For this value chain the
following five main nodes or levels were identified: the sunflower seed producers (farm
level), the crushers of seed, the refineries of crude oil, the wholesalers and retailers and,
finally, the consumers. Table 6.9 represents the supply chain from sunflower seed to
sunflower oil for the month of July 2003.
The farm gate price is derived from the SAFEX average nearby contract price, which is
lagged by three months. Statistical tests proved that the level of correlation between the
SAFEX price of sunflower seed and the consumer price of sunflower oil is the highest
when the SAFEX price is lagged by three months. This implies that it takes three months
from when the crushers buy the sunflower seed until the oil appears on the shelf. A
number of role players also argued in favour of the inclusion of a 3-month lag period
between the SAFEX price and the consumer price simply because of the period of time
required for processing the oil as well as the need for basic hedging strategies. Therefore,
the price of R1717/ton reflected in Table 6.9 since the SAFEX price is actually the
average monthly nearby contract price traded on SAFEX for the month of April 2003.
The price of R9 996.25/ton reflected in Table 6.9 as the sunflower oil retail price is
derived from the price of a 750ml bottle of “cheapest cooking oil”. After taking into
account factors such as the density of the product, it was calculated that 1 454 bottles
(750ml) of cooking oil represent one tonne of oil.
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Part 4
Table 6.9: The Sunflower seed –to- sunflower oil supply chain
Units
A) FARMERS
FARMGATE PRICE
Transport cost: Farm gate to silo
Handling & Storage cost: Costs of farmer
SAFEX (nearby contract)
B) SUPPLY OF CRUDE OIL
1) Imports of Crude Oil
Sunflower Crude Oil, Argentina FOB
Freight
Insurance
Duty
Discharge and clearing transport
Exchange Rate
Sunflower Crude Oil, factory @ Durban
Transport: Durban to Reef
SUNFLOWER CRUDE OIL PRICE, FACTORY @ REEF
2) Local supply of Crude Oil: Crushing activity
Transport cost: Silo to crushing plant
Handling cost: Costs of crusher
Storage costs: Costs of crusher
Interests paid on investment
PRICE CRUSHERS PAY FOR SEED
Fixed costs
Variable costs
Total costs of crushing
CAKE PRICE
Crude oil contribution (39% extraction from 1ton of seed*Oil price)
Cake contribution (42% cake from 1ton of seed*Seed price)
Costs of seed
CRUSHING MARGIN
TOTAL CRUSHING COSTS
MANUFACTURERS REALISATION (CRUSHING)
C) REFINEMENT ACTIVITY
SUNFLOWER CRUDE OIL PRICE, FACTORY @ REEF
Interests paid on investment
Fixed costs
Variable costs
Total costs of refinement
Total costs before refinement loss
TOTAL COSTS OF REFINED SUNFLOWER OIL(exl. packaging)
D) PACKAGING ACTIVITY
Interests paid on investment
Fixed costs
Variable costs
Total costs of packaging
Distribution costs
TOTAL COSTS OF SUNFLOWER OIL (incl. packaging)
MANUFACTURER-TO-RETAIL MARGIN (Pure sunflower oil)
SUNFLOWER OIL RETAIL PRICE
240
Jul-03
R/ton seed
R/ton seed
R/ton seed
R/ton seed
1576.00
106.00
35.00
1717.00
US$/ton oil
US$/ton oil
US$/ton oil
US$/ton oil
US$/ton oil
R/US$
R/ton oil
R/ton oil
R/ton oil
539.00
40.00
6.47
53.90
27.00
7.53
5017.75
120.00
5137.75
R/ton seed
R/ton seed
R/ton seed
R/ton seed
R/ton seed
R/ton seed
R/ton seed
R/ton seed
R/ton cake
R/ton oil
R/ton cake
R/ton seed
R/ton seed
R/ton seed
R/ton seed
86.00
35.00
100.00
140.00
2078.00
65.00
120.00
185.00
900.00
2003.72
378.00
2078.00
303.72
185.00
118.72
R/ton oil
R/ton oil
R/ton oil
R/ton oil
R/ton oil
5137.75
58.00
188.00
180.00
426.00
5563.75
5918.88
R/ton
R/ton oil
R/ton oil
R/ton oil
R/ton oil
R/ton oil
R/ton oil
65.00
120.00
270.00
455.00
250.00
6623.88
3372.37
9996.25
Analysis of selected food value chains
It is important to note is that two possible sources for the supply of crude oil to the local
refineries are included in the framework. The first source of supply of crude oil is
imports. Table 6.9 clearly illustrates the calculation of the import parity price of
sunflower crude oil of R5 137.75/ton. The second source of supply is the local crushers.
Estimates for local crushing costs, the possible crushing margin, and the crushers’
realisation are presented in section B2 of Table 6.9. The crushing margin of R303.72/ton
of seed is calculated by deducting the costs of seed at the crusher’s door (R2078/ton)
from the income generated by the sales of the oil (R2003.72 = 0.39*R5137.75) as well as
the sales of the cake (R378 = 0.42*R900/ton) that were extracted from a tonne of seed.
For the purpose of these calculations, an average extraction rate of 39% is used for oil
and 42% is used for cake. Thus, one tonne of raw sunflower seed produces on average
390 kg of crude oil and 420 kg of cake. The total crushing costs are estimated at
R185/ton, which implies that the crushers’ realisation is estimated at R118.72/ton
(R303.72 – R185) of seed.
It is important to keep in mind that the value of the crude oil is derived from the import
parity price of crude oil. Industry specialists feel that at specific periods in the year the
local price of crude oil trades below the import parity price levels. However, it was
decided that for the purposes of these calculations a higher price of crude oil will reflect
the “worse case” scenario because crude oil is regarded as the raw material and the higher
the price of the raw material that enters the value chain, the slighter are the possibilities
of making profit if the retail prices are kept at a constant level. Thus, the calculations in
Table 6.9 reflect the worst-case scenario for the value chain.
Total costs of refinement are estimated at R426/ton oil and the total packaging costs
(including distribution costs) are estimated at R655/ton oil. The total costs of refined
sunflower oil (excluding packaging) including refinement losses of 6% are estimated at
R5918.88/ton. If packaging costs and distribution costs are added to this value, the total
cost of sunflower oil, before it enters the wholesale and retail sector, is R6623.88/ton oil.
Table 6.10: Summary statistics of sunflower value chain calculations
Units
Manufacturer-to-Retail margin
R/ton
Raw material as percentage of retail price (Crude Oil)
%
Conversion costs as a percentage of retail price
%
Packaging as percentage of retail price
%
Source: Own calculations
July 2003
3372.37
51.40%
13.56%
4.55%
The manufacturer-to-retail margin (Table 6.10) is calculated by deducting the total costs of
sunflower oil from the retail price of sunflower oil. Table 6.10 reports a manufacturer-toretail margin of R3 372.37/ton (R9 996.25-R6 623.88). Within this margin, or “price gap”,
lie the total costs of administration and marketing of the retailers and wholesalers as well as
the profits of the wholesalers, retailers and refineries. Similar to the miller-to-retail margin,
not many assumptions are made to obtain the manufacturer-to-retail margin and, therefore, a
great deal of emphasis is placed on this measure.
Figure 6.6 below, depicts the trends in the manufacturer-to-retail margin, and the imports of
sunflower oil and soybean oil. As previously mentioned, during November and December
2001 the price gap between the world price of sunflower and soybean oil increased
significantly as a result of the sharp increase in the price of sunflower crude oil. The impact
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Part 4
of this sharp increase in the price of crude oil on the manufacturer-top-retail margin is
illustrated graphically in Figure 6.6. The manufacturer-to-retail margin became negative in
this period. With the soybean crude oil price more than US$ 200/ton cheaper than the crude
oil price of sunflower, refineries started substituting sunflower oil with soybean oil and
imports of soybean oil increased sharply. The fact that the retail price, which was used for
the purpose of these calculations, reflects the price of “cheapest cooking oil” on the shelf,
and not pure sunflower oil, implies that it reflects the price of blended oil. Pure sunflower oil
is always sold at a premium. This premium can in some stores be as high as 30%.
Soyabean oil imports
Sunflower oil imports
Manufacturer-to-Retail margin(Pure sunflower oil)
50,000
4000
45,000
3000
40,000
35,000
Tons
25,000
1000
20,000
R/ton Oil
2000
30,000
0
15,000
10,000
-1000
5,000
0
-2000
ta
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Figure 6.6: Manufacturer-to-retail margin versus oil imports
Source: Department of Trade and Industry & own calculations, 2003
An inverse relationship between the manufacturer-to-retail margin and the level of
soybean imports can be identified in the figure above. Whenever the margin decreases the
level of soybean crude oil imports increase. From 2001 to 2002 sunflower crude oil
imports decreased by 97.2%, while the imports of soybean oil increased by 54.9%. Table
6.11 shows that, apart from sunflower oil, the imports of all the crude oils have increased.
Table 6.11: Oil imports 2000 - 2002
Quantity Imports (tons): Jan – Dec
2000
2001
2002
Sunflower Oil
130,251
105,979
2,949
Soybean Oil
19,003
85,217
131,960
Peanut Oil
560
14
18
Olive Oil
2,565
2,620
2,837
Palm Oil
168,174
216,695
236,846
Cotton Seed Oil
0
19,651
29,522
Total
320,553
430,177
404,131
Source: Department of Trade and Industry, 2003
% Change
00- 01
01- 02
-18.6%
-97.2%
348.4%
54.9%
-97.5%
24.3%
2.2%
8.3%
28.9%
9.3%
50.2%
34.2%
-6.1%
The results suggest that the refineries had to blend different oils into the final product to
maintain a positive manufacturer-to-retail margin. Regulations on food safety and
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Analysis of selected food value chains
product standards require that sunflower oil, which is labelled as “pure sunflower oil”,
must contain no less than 90% of pure sunflower oil.
Figure 6.7 depicts the increase in the percentage share of raw material costs and the
conversion costs of the value of the final product (retail price of sunflower oil). The price
of crude oil entering the value chain is regarded as the “cost of raw material”. In July
2003, the cost of raw material was R5 137.75/ton, which resulted in a percentage share of
the final product of 51% (R5 137.75/R9 996.25 = 0.51). The share of raw material costs
increased from 53% in 2000 to 71% in 2002. Over the past nine months, this share has
decreased again to an average of 54%. The main contributing factor to this decrease in
the share of the final good was the appreciation of the exchange rate, which led to lower
import parity prices. Conversion costs as a percentage of the final value of the product
have remained fairly constant over the past four years (14% to18%).
Raw material as percentage of retail price (Crude Oil)
Conversion costs as a percentage of retail price
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
Jan-Dec
Jan-Dec
Jan-Dec
Jan-Oct
Year
Figure 6.7: Raw material and conversion costs
Source: Industry specialists & own calculations
6.5 Conclusion
There are many factors to be taken into consideration in addressing the critical question
of who is capturing profits in this value chain. Firstly, in section 6.2.2 it was mentioned
that only 65% of the local crushing capacity is utilised. Secondly, the local crushers have
to compete with the international market because crude oil is highly tradable and is
therefore traded in high volumes. Finally, and most importantly, opposed to the trends in
other value chains, statistical tests in Part Five of the Report show that retail prices of
sunflower oil have responded in the same way to upward shifts in raw material costs as to
the downward shifts.
Barriers to entry in this market are limited since there is the possibility of ‘toll’ or
contract crushing (R298/ton) which carries the implication that anybody can enter the
sunflower oil market. It is for this reason that the Committee is confident that healthy
competition exists between domestic producers and processors, as well as importers.
243